Thursday, May 14, 2009

When the stockmarket does the analysis

Today the news is all about green shoots becoming brown shoots. A couple of (entirely predictable) bad bits of data and the stock market goes down telling everyone that all is ill. But green shoots were always a metaphor. Almost all data suggests and continues to suggest is that things are getting worse – but less fast. We are past the “point of inflexion”.

Unemployment is still getting worse – just less fast.

Mortgage delinquencies are still getting worse – just less fast.

Indeed there are very few things that are not getting worse. Rupert Murdoch said that US television advertising is not getting worse but that was one of the few unequivocal “point of recovery” statements I have heard from a credible source. (Rupert was early calling how bad it was too.)

That said – when things inflected the stock market started going up hard. And people reinterpreted “point of inflexion” to mean “point of recovery”.

Now being past the point of inflexion is important. It doesn’t signal the end of difficulties – but at least it enables you to do some modelling. When things are getting worse at an increasing rate (say mortgage delinquencies) and they are outside historical bounds, then anyone who tells you they can model them is frankly “just making it up”. Even the most sophisticated analyst out there (including Warren Buffett) is just a talking head.

When things have inflected the confidence in your model will increase. If things are getting worse at a less rapid rate then it makes some sense to model a slowdown on historical norms. Whilst your number remains an “estimate” (and liable to be wrong) it is more likely to be a good estimate. You have at least some basis for your statements.

Before the inflexion almost everyone who estimated end losses on a rigorous basis (including me) underestimated them. The only people who were right were people who diagnosed that this was not like other recessions and managed to pull a reasonable number out of the air. I did a bit of that too and my guesses were better than my models. But they were non-rigorous guesses.

The recession could suddenly turn for the worse again and what looks to be a reasonable estimate will (again) be wrong. I would never bet my life or entire fortune on such an estimate – but moderate guesses are sensible – indeed as sensible as they ever get in stock market land.

The point of inflexion is important because “it is moderately safe” to be a stock analyst again.

Not that you would know from today’s market action. Green shoots it seems have dried up. But that is reading from the stock market to the economy. Reading the other way there were never any really substantial green shoots and never to actually dry up.

But that doesn’t mean all is ill. We are past the point of inflexion – and that is good news independent of where the market is. It is not great news for the people who will lose their jobs next month (and there will be plenty of such people - just less than last month.

But then we live in the age of omniscient markets. The markets do the analysis. Why bother reading this blog?

Have been reading this blog for a while but not posted. Way to "long" for my liking, but I read for interest sake. Also the writing is top class.

Babar,

I think you have misread your blog obsession meter. I call it the blog-o-meter. The reason more people were looking at blogs and reading the financial press is because the herd was at a very negative extreme, signaling a reversal. No that blog numbers are falling and the stock market is off the front page, the signs are bearish. The herd has temporarily switched back to being positive.

Should this current fall only be correcting the rally from March 9 then it will lead to more rallies. If that happens, look out for the headlines "Recession is over" "New bull market under way" "Jump in now or miss out". That will be a very bearish sign indeed.

When the herd flips back to negative again, the financial blog readership will rise once more.

When ever the stock market is on the front page in a sustained way, it can be a contrarian signal that the market is nearing a turn.

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